You are here: Political Economy » Government banking Irish edition
The Irish government today announced that, if necessary, it is prepared to take majority shareholding in ailing Irish banks. However, it has ruled out full-scale nationalisation. But, what is a majority share by government except nationalisation?
This is a duplicitous parsing of words that hides a more sinister interpretation of what is happening in Ireland.
"Some institutions may need capital after they have transferred loans to Nama," Lenihan told a joint Irish parliamentary finance committee this afternoon. But the minister ruled out full-scale nationalisation of the country’s banks. "This will increase the state’s ownership in these banks and in some cases that may result in a majority shareholding," he said.
So, if I could paraphrase Lenihan, he is saying: we are having a temporary problem in Ireland whereby some of the weaker but systemically important institutions need more capital. We in government are going to give them that capital to maintain the functioning of the financial system. Technically, this makes us the majority owner, with all the rights, privileges and responsibilities ownership entails. However, we don’t want to be bank owners and will look to reduce our stake when these firms return to a better capital position or raise more funds from private investors.
I translate this as Lenihan implying the government intends to socialize the losses of the Irish banking system despite the looming fiscal problems in the country. In my view, this is the worst outcome of potential policy remedies and the least free-market approach. However, there may be a silver lining in terms of a healthier banking system.
Back in March when everyone was actually talking about solutions, James Kwak categorized three dominant potential banking system solutions. I have bolded the parts I intend to stress:
I think there are three main positions in this debate:
- A1: The banking system is broken. Banks need to get rid of their toxic assets and they need more capital. The solution is for the government to buy their toxic assets at a high price (or insure those assets) and to give them lots of cheap capital.
- A2: The banking system is broken. Banks need to get rid of their toxic assets and they need more capital. The solution is for the government to take them over, transfer off their toxic assets, recapitalize them, and (when possible) sell them back into the private sector.
- B: The banking system is basically sound and will recover if we give it some time. In the meantime, the government should give the banks just enough money and intervene as little as possible to keep them afloat until asset prices recover.
Do you recognize these solutions? A1 is America’s dead-on-arrival PPIP program which was killed by A2, used successfully by the FDIC every Friday night, and A3, otherwise know as the bailout of too-big-to-fail institutions like Citigroup and Bank of America, neither of which has yet to return TARP money.
It sure sounds like Ireland is trying to implement solution B a.k.a. socialization of too big to fail bank losses. The problem of course is the Iceland scenario i.e. a situation in which the government, now majority owner of several large financial institutions, cannot credibly act as guarantor for those institutions, but has implicitly or explicitly promised to do so. I don’t like the drip-drip-drip approach because it creates the zombie bank problem I just spoke of in my last post on Scandinavia. This is the same approach taken with RBS and Lloyd’s-HBOS and in the U.S. with Citi and BofA. But, in Ireland, there is even more downside risk as there was in Iceland.
However, at a minimum, the Irish are talking about hiving off bad assets from good and trying to re-insert the cleansed financial entity into the banking system. This is the approach Sweden took in its early 1990s bank crisis. If one is going to have government banking – and this is what is happening in Ireland no matter how you parse the words – one needs to know that the resulting private financial institutions will be healthy. Ireland’s National Asset Management Agency gives the country a good chance of getting those healthy banks.
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
Like us on Facebook
Follow Edward on Twitter
- A Return to Fundamentals?
- Greek default
- The Euro is a failure
- Some thoughts on the coming defaults of Greece
- Greek default and Grexit now increasing in probability
- Morality in the Greek Crisis
- Grexit: The staggering cost of central bank dependence
- This is the Framework of a Potential Greek Compromise Taking Shape
- Yanis Varoufakis: Greece, Germany and the Eurozone – Keynote at the Hans-Böckler-Stiftung, Berlin, 8 June 2015
- Are bond investors crying wolf?
- Internal and external balance of savings and investment
- Trends and prospects for private-sector deleveraging in advanced economies
- How do you say “dead cat” in Latvian?
- Property, inequality and financial crises
- A parallel currency for Greece: Part II
- A parallel currency for Greece: Part I
- The Latvian financial crisis
- Are The IMF and the EU at Loggerheads Over Greece?
- What multiple should we give China’s GDP growth?
- How to dress for a rainy day (of low nominal investing returns)
-  Varoufakis will resign if Greece votes yes
-  Greece defaults on IMF
-  Is the Euro a failure?
-  Greek banks are bankrupt but who’s to blame for crisis?
-  Alarming decline in US labor participation and Rick Rule on oil sector investing
-  How Fed policy contributed to the housing boom and bust
-  Rickards on Greece, China, Iran and Trade
-  Aviation cyberattacks, online-to-offline technology and encryption by default
-  Slowing growth in Brazil and China; Greece nears D-Day
-  Greece gets a lifeline and Heinberg on OPEC